The Retail CEO Pay Report: 2008

Retail CEO pay continues to rise. Average retail CEO compensation for companies in the Standard & Poor’s 500 increased to $8.25 million during the most recent fiscal year, a 122 percent hike.

That’s a hefty gain by any measure, yet there remains a widening disparity between the salaries paid to retail CEOs and the payouts remunerated to top executives at non-retail companies in the index. The total compensation packages tallied by CEOs across a broader spectrum of businesses increased 212 percent.

These are some of the conclusions of the second annual STORES CEO compensation study conducted by Reuters Fundamentals. The survey, conducted in late 2007, examined the pay packages of the chief executives of 33 U.S. retail companies as part of a larger research project to be published by the Financial Times next month.

Reuters defined total compensation as salary, bonuses, exercised options, restricted stock awards, long-term incentive payout and other long term compensation and pension. Companies included in the study were those that had the same CEO for the last two years. Information was gleaned from annual reports.

Net earnings for the retail companies included in the study grew an average of 7.4 percent, and total shareholder return (dividends plus stock price increases) grew 20 percent. By comparison, the figures in the broader study (which covered corporations across the S&P Index) reveal that net income grew an average of 12 percent and total shareholder return increased 17.2 percent.

Last year was one of mixed performance for the retail industry and several of its corner office executives. For many companies, the past 12 months were defined by retrenching and re-examining business strategies against the backdrop of a weakening economy, inconsistent consumer spending and continued industry consolidation. Still, while critics may be quick to label retail CEO pay hikes as being out of sync with industry performance, that view may prove to be short-sighted.“Retail had a difficult year (in 2007), and earnings performance is down pretty much across the board,” says Ashwani Kaul, senior research analyst at Reuters Fundamentals. “Because compensation is still rising, the relationship of CEO compensation to earnings and total shareholder return is less clear than it was a year ago.”

In fact, the generally hefty increases in CEO pay for the last fiscal year are due, in some measure, to new SEC regulations regarding compensation disclosure that went into effect in December 2006. The details of the new regulations are complicated — the SEC document laying them out is over 300 pages long — but the net
effect has been to force companies to disclose things in the compensation totals that were heretofore tucked away elsewhere in the annual report.

The new disclosure rules, which cover things like pension plans, “make it a lot more apparent what CEOs are receiving in terms of total compensation,” Kaul says.

Retail CEO compensation is often best viewed as a window into the broader make-up of a company. Target CEO Robert Ulrich was the highest paid industry executive. Ulrich, who’s held the top spot there for a dozen years, is credited with crafting Target’s unique brand and marketing image. The company continued to hit the bull’s-eye in 2007, delivering new products and experiences and reaching new levels when it comes to giving back.

Last February, Target reached a monumental milestone in giving; the chain now donates more than $3 million each week to help strengthen families and communities across the nation. On one day in October, Target opened 61 stores; in November, it added a new dimension to fashion by debuting the first-ever model-less fashion show and the world’s first virtual fashion show.

Never one to rest on his laurels, Ulrich will cut the ribbon this summer on Target’s first food distribution center – a move that signals the company’s continued commitment to that portion of its business.

Wal-Mart CEO H. Lee Scott ranked second on the list, pulling in $29.7 million last year. Scott has steered Wal-Mart through a difficult 12-month period – arguably its most challenging in at least 27 years. Yet while company sales took it on the chin, Scott championed one of the most heralded “green” efforts of any global company and continued to move forward despite endless media bashing.

Michael Jeffries of Abercrombie & Fitch, Ralph Lauren of Polo Ralph Lauren and CVS Caremark’s Thomas Ryan round out the top five highest-paid CEOs in the study.

Jeffries spent the better part of 2007 beating profit predictions and won kudos for the opening of a flagship Abercrombie & Fitch store on London’s famed Saville Row in March. This year, the much anticipated “Concept 5”will be unveiled. Given Jeffries’ track record, industry watchers expect to be wowed.

The concept of pay for performance has been a hot-button issue for decades, and the retail arena came under particular scrutiny last year when former Home Depot CEO Robert Nardelli became the poster child for pay/performance imbalance. While disparities remain, pay and performance continue to be more closely aligned in retail than in other sectors.